exercise 14-29

Project Description:

spiro hospital is investigating the possibility of investing in new dialysis equipment. two local
manufacturers of this equipment are being considered as sources of the equipment. after-tax
cash inﬂows for the two competing projects are as follows:
year puro equipment briggs equipment
1 $320,000 $120,000
2 280,000 120,000
3 240,000 320,000
4 160,000 400,000
5 120,000 440,000
both projects require an initial investment of $560,000. in both cases, assume that the equipment
has a life of 5 years with no salvage value.
required:
1. assuming a discount rate of 12%, compute the net present value of each piece of equipment.
2. a third option has surfaced for equipment purchased from an out-of-state supplier. the cost
is also $560,000, but this equipment will produce even cash ﬂows over its 5-year life. what
must the annual cash ﬂow be for this equipment to be selected over the other two? assume a
12% discount rate.